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European Union: how is it going in the budget dispute with Italy?

The dispute over Italy’s budget escalates. On Tuesday afternoon, the EU Commission rejected the Italian draft budget.for 2019. This is a first in the evaluation of national budget plans. If Rome does not penalize, an excessive deficit procedure threatens to end with billions of dollars in fines. But an open confrontation with Italy could also call into question the EU’s decision-making capacity. An overview:

Is Rome really against the EU Stability Pact?

The EU Stability Pact allows a budget deficit of no more than three percent of economic output. With 2.4 percent, Rome 2019 wants to remain within the framework. However, since the reform of the pact during the financial crisis, Brussels has been able to move towards countries that are heading for the three percent. Brussels also looks at the total debt: this should not exceed 60 percent of economic output. With around 131 percent, Italy’s debt is more than twice as high.

What happens after the budget rejection?

Italy, after being rejected by the Commission, has three weeks to present a “revised” draft budget. This will then be re-examined in Brussels, again for up to three weeks. If criticism persists, the Commission can open a case of excessive deficit. This must be approved by the other euro states.

What threatens Italy in such a procedure?

At the end could be high fines. They can amount to up to 0.2 percent of annual economic output under EU rules. In 2017, this was just over 1.7 trillion euros. The fine could be up to 3.4 billion euros. It is also possible that Italy will be reduced claims for funds from the European Structural Funds.

Is a fine likely?

So far, the EU has never imposed a fine. In 2016, for the first time ever, a fine was initiated against the permanent deficit sinners Spain and Portugal. However, the Commission and the Euro Finance Minister then looked away from fines. This was justified by the difficult economic and social situation in both countries. The Federal Government had initially at least pounded on a cut in structural aid, but eventually gave way.

Does Italy have leverage in the budget dispute?

Yes. If the dispute escalates, the EU’s ability to act could be endangered. For in foreign and security policy, in EU finances and in some other areas, decisions in the Union still have to be made unanimously. This applies, for example, to the extension of the EU naval mission “Sophia” off Libya, which is due by the end of the year. Or for the economic sanctions against Russia because of the Ukraine crisis, which will run until the end of January 2019.

Could the dispute put other euro countries under pressure?

This is feared by the chairman of the European Parliament’s conservative EPP Group, Manfred Weber (CSU). He warned on Tuesday that the financial markets would react negatively to the situation in the eurozone’s third largest economy. According to him, they could also have “effects” on former crisis countries such as “Spain, Portugal, Greece”. Rising lending rates, for example, are also conceivable for these states if Italy’s share price shakes investors’ confidence.